External Audit Services Research Articles

The Effect of Potential Rush Money and Fraud on the Need for External Audit in Rural Credit Institutions with Leadership Idealism as a Moderating Variable

This study aims to examine the effect of potential rush money and fraud on the need for external audit in Rural Credit Institutions (LPD) with leadership idealism as a moderating variable. This study used the head of the LPD in Bali Province who is still actively operating as a population. The method of determining the sample used is the purposive sampling method. Data analysis used SEM-PLS (Structural Equation Modeling-Partial Least Square) Version 3. The result shows that the potential for rush money has a positive effect on the need for external audit services for Rural Credit Institutions, which indicates that the potential for rush money that is likely to be experienced is capable of increasing the need for external audit services. The result shows that the potential for fraud has a positive effect on the need for an external audit of the Rural Credit Institution, which indicates a potential for fraud that may be experienced can increase the need for external audit services. The results show that the idealism of the leadership can strengthen the influence of the potential rush of money on the need for an external audit of Rural Credit Institutions and the idealism of the leadership can increase the influence of potential fraud on the need for external audit services for Rural Credit Institutions. Therefore, rural credit institutions need to pay attention to the importance of conducting regular external audits to ensure that their business practices are running well and in accordance with established standards.

The impact of audit committee on financial reporting quality

The above research papers confirm the fact the accuracy and credibility of financial reports issued by listed firms are crucial for an efficient and viable stock market. Unfortunately, accounting fraud and other financial market misconduct are prevalent in the global market, and have seriously damaged interests of shareholders around the world. To prevent this bad phenomenon and to improve investor confidence, governments around the world have implemented a series of reforms to strengthen internal and external corporate governance mechanisms. Many of these regulatory changes have focused on the composition of an audit committee, a board sub-committee in charge of overseeing a firm’s financial reporting process, internal control structure, internal audit functions, and external audit services. Thus, the aim of this paper is to show the relationship between the impacts of audit committee on financial reporting quality. To achieve the objectives of the paper, the researcher relied on reviewing 15 related studies that were published in different journals and by different authors for time periods (2016 - 2020).

The role of internal audit activity in acquiring external audit services: An empirical study of banks

The role of internal auditing has received significant attention from researchers in the recent past. Due to its enormous contribution to the banking system, it has been used extensively to support other governance processes. The objective of this research paper is to explore how internal audit activity plays a role in the acquisition of external audit services in the national banks of the United Arab Emirates (UAE). Internal audit activity and external audit services represent a dynamic process of the corporate governance process. The study uses both qualitative and quantitative data to determine the role that internal auditing plays in the acquisition of external audits. The data is collected from 27 national banks in the UAE using questionnaires, hence it gives the opinions that people have about auditing as well as the figures of respondents. The study aimed to understand how the functions of internal audits contribute to the acquisition of external audits. The main contribution of this study is supporting the arguments that auditing researchers have not been fully responsive to the issues associated with changes in internal audit, services that may be offered, and internal audit’s growing function (Hayek, 2013)

Does External Shariah Audit (ESA) Matter? Practitioners' Views from the Islamic Banking Industry

This paper investigates the possibility and feasibility of the Islamic banking industry in Malaysia to hire external Shariah audit (ESA) services in the audit fraternity as one of the Shariah governance mechanisms to strengthen Shariah compliance in the industry. Methodologically, the study employs a qualitative method by utilizing semi-structured interviews with nine (9) key industry players consists of few Shariah auditors, heads of Shariah audit, Shariah committee, and Chief of Shariah officer. Data gathered from the interviews have been transcribed and analyzed using Atlas.ti. The findings from the interview provide interesting mixed views in the sense that both parties have their justifications to support their arguments based on experience and observation. However, considering the current practices by the Islamic banking industry, it could be inferred that the Malaysian Islamic banking industry is not ready to exercise the ESA practices. The future study may consider other views from other relevant parties such as the regulator and external auditor to produce a more solid and robust result. Keywords: External Shariah Audit, Islamic Banks, Qualitative Method, Shariah Governance

Ownership structure and audit quality: the mediating effect of board independence

PurposeThis study aims to examine the mediating effect of board independence on the relationship between ownership structure and audit quality.Design/methodology/approachThe research uses generalized methods of moments regression to test the relationship between ownership structure and audit quality. The sample consists of 162 non-financial firms listed on the Gulf Cooperation Council stock markets between the years of 2009 and 2016. To test the significance of the mediating effect, this paper uses the Sobel test.FindingsEmpirical findings show that companies with higher family ownership are less likely to demand extensive audit services and, as a result, pay lower audit fees. Conversely, this study finds that companies with higher active and passive institutional ownership are more likely to engage high-quality auditors and pay larger audit fees. As for government ownership, it has no significant impact on audit fees. The results also reveal that the negative (positive) effect of family (institutional) ownership on audit quality follows the path through reducing (enhancing) board independence. Further tests are conducted and support the main findings.Practical implicationsThis study has important implications for policymakers and regulators to address the conflict between controlling shareholders and minorities by promoting higher standards of audit quality. The study findings may be useful to investors, assisting them in making better-informed decisions and aids other interested parties in gaining a better understanding of the role played by ownership structure in audit quality. The study also contributes to the strategic board behavior by bringing a new perspective on how boards engage in monitoring by requesting external audit services. This behavior is likely to be influenced by the type of controlling shareholder.Originality/valueThe main contribution of the present paper is to examine the board composition as a potential mediating variable between ownership structure and audit quality. Moreover, it highlights the issue of improving governance mechanisms.

Performance Improvement of Non-Governmental Organisations through Financial Management: A Case study of Young Men's Christian Association of Ghana

Non-governmental organizations (NGOs) in Ghana have a history of being short-lived. However, Young Men's Christian Association (YMCA) Ghana, on the other hand has achieved notable success by impacting millions of lives over 50 years of working in Ghana. Apparently, this research investigates into the key financial management practices of NGOs in Ghana using the case of YMCA Ghana. The study revealed that, the quality of Financial Management staff and their responsibility is the most effective financial management indicator in YMCA Ghana amongst all the other well-functioning indicators. Nevertheless, it is evident in the study that the challenge YMCA Ghana faces in its financial management practice is irregular external audit review of financial and accounting information. Therefore, it is recommended that frequent subscription for external audit services should be established in NGOs and also, cost effective monitoring, evaluation, accountability and learning (MEAL) programme management framework should be adopted by NGOs in Ghana.

An Analysis of Internal Audit Investment Among Top Malaysian Listed Companies

The importance of internal audit function in improving the company’s internal control risk management and corporate governance has been emphasized in the Malaysian Code of Corporate Governance (MCCG) and Bursa Malaysia Listing Requirements. Based on the Listing Requirements, Malaysian listed companies are required to establish the internal audit function, which is independent and this function must be supervised by the audit committee. Although the importance of internal audit function has been highlighted in various code of corporate governance, little is known about the investment made by the company in internal audit activity. This study capitalizes the publicly available data on internal audit cost and the type of internal function provider in Malaysia setting. The primary purpose of this study is to describe internal audit practices, especially on the internal audit budget in Malaysia for the year 2017 for top 300 companies. Based on the descriptive analysis, it is found that the internal audit fee is relatively lower than the cost of external audit and most of the companies’ internal audit function was carried out by in house teams. Also, the benefit from economies of scale is less pronounced in internal audit as compared to external audit services. Some further analyses were also conducted, and the article is ended recommendations for future research to be undertaken in investigating the internal importance audit in Malaysia.

Pengaruh Jumlah Anggota, Size, Likuiditas, dan Rentabilitas Koperasi terhadap Permintaan Jasa Audit Eksternal

The purpose of this research is to empirically examine the influence of the number of members of the cooperative, size, liquidity, and rentability of cooperatives to demand external audit services. This study uses a sample of Cooperative Employees (Kopkar) in the city of Bandar Lampung during 2009-2011 using purposive sampling method. The analysis in this study uses logistic regression equation. The result of this study found that the size variable has a significant influence on the demand for external audit services. While the variable of a number of cooperative members, liquidity, and rentability do not significantly influence the demand for external audit services.Keywords: Request for External Audit Services, Cooperative of Employees,�Number of cooperative members, Size, Liquidity, and Rentability.

Audit committee structure and bank stability in Vietnam

The role of the audit committee in maintaining banking stability is becoming increasingly important. However, there are not many studies have examined the relationship between the audit committee structure and bank stability in developing countries. This paper examines the relation of the audit committee structure and the bank stability in the difference level of bank stability and the role of external audit quality in this relation by employing empirical techniques like 2SLS, S-GMM or quantile regression analysis with panel data, and using a sample of 37 commercial banks in Vietnam from 2002 to 2018. Our empirical results show that bank stability varies negatively with audit committee size, but this relationship is mitigated in banks that use good external audit services. Moreover, we also find that the relation of the audit committee structure and bank stability is heterogeneous, and that it is stronger in banks with higher stability levels. Based on these results, banks that have a large audit committee should consider a high quality external audit service and should increase the proportion of financial and accounting expertise in the audit committee in order to ensure bank stability.

Evaluation of external audit services: An empirical approach on health care organizations

The International Auditing Standards mainly concern the quality of audit work and their objective is to help the external auditor provide reasonable assurance for the financial statements with the most effective way. The aim of this paper is to evaluate external audit services based on the International Standards on Auditing. Specifically, there is an empirical approach in the health sector aimed at the investigation of the quality of the audit work, the general principles and responsibilities, the risk assessment, the audit evidence and using the work of others. To facilitate the progress of this research, a questionnaire was created and distributed to the employees of the Economic Departments of the largest health care organizations in Northern Greece. The results depict that “risk assessment”, “audit evidence” and “using the work of others” are factors that affect positively audit quality.

Board monitoring and audit fees: the moderating role of CEO/chair dual roles

PurposeThis paper aims to examine whether CEO/chair dual roles influence board monitoring-audit fees nexus. The impact of corporate governance on audit fees literature is lacking in the banking sector, which is subject to different regulations and reporting requirements to other sectors. The level and quality of external audit services are important not only to shareholders and customers but also for regulators’ reputations and public confidence.Design/methodology/approachExamining a sample of the US national commercial banks, this study fills the gap by empirically examining whether the attributes of internal corporate governance mechanisms, proxied by boards of directors and audit committee characteristics, are related to audit fees. We introduce two interaction variables to understand whether chief executive officer (CEO)/chair dual roles influence the relationships between board independence and audit fees on the one hand and between the audit committee and audit fees on the other hand.FindingsWe find that audit fees are positively associated with board independence, board size, CEO/chair dual role and audit committee financial experts. The results of the interaction variables indicate that boards with higher independence and more effective audit committees tend to demand higher audit quality, and consequently, pay higher audit fees to protect shareholders’ interests from potential power abuse by CEOs who also chair boards.Originality/valueThis study contributes to the literature by providing extensive understanding of the influence on audit fees of the independence of the board of directors and the effectiveness of the audit committees. The authors first examine the impact of each individual governance variable separately and then introduce two interaction variables. This study provides policymakers with insights into the existing relationships between audit fees and the banking sector governance structure.

Dose Listed Jordanian Manufacturing Firms’ Profitability and Size Affecting External Audit Fees?

The external audit services and fees charged by clients to their auditors are clearly of benefit to both clients and auditors: Clients are legally required to have their financial statements audited and desire the fees they pay to be plausible, auditors render such services and care to ensure that the fees they charge are enough to qualify a favorable and pleasant service to be provided (Kikhia, 2014). What distinguish the current investigation is the empirically examination of profitability and size and how affecting the external audit fees in industrial sector in Jordan for a total of five years, also the current investigation is prompted by the absence of studies on auditing and consulting expenses in Jordan, especially in manufacturing sector, which leads in this study to examine the effect of Profitability and size of listed Jordanian Manufacturing firms on External Audit Fees. To achieve this target the study used quantitative techniques by using the (Eviews) software during the period from 2010 to 2015. The outcomes showed that there is no significant effect of return on asset (ROA) of listed Jordanian Manufacturing firms separately on external audit fees, also, there is a significant effect of size of listed Jordanian Manufacturing firms separately on external audit fees, and finally, there is a significant effect of Profitability and size of listed Jordanian Manufacturing firms jointly on external audit fees.

Does Corporate Tax Aggressiveness Influence Audit Pricing?

We evaluate whether, and under what circumstances, corporate tax aggressiveness influences audit pricing. Using a compound measure of two long-run effective tax rates, we find that tax aggressive firms pay higher fees for external audit services after controlling for factors related to earnings management. The fee premium increases with management’s uncertainty about the sustainability of tax positions if audited by tax authorities (i.e., disclosed tax reserves). Further, the provision of auditor-provided tax services may create knowledge spillovers that alleviate the fee premium for tax aggressiveness, unless tax uncertainty is high. Finally, an accounting firm’s industry expertise in auditing is associated with higher audit fees independent of tax aggressiveness, whereas industry expertise in taxation leads to a fee premium only for tax aggressive clients. Overall, the evidence implies firms’ aggressive tax behavior, tax services provider, and auditor-expertise interact to influence the pricing of audit engagements.

THE FIRST EXTERNAL AUDITORS OF THE HUDSON'S BAY COMPANY, 1866

At the request of shareholders, the Hudson's Bay Company had its financial statements audited for the first time in 1866. Two external auditors were hired, one for the shareholders and one for management. Three inter-related forces led to this decision: (1) most importantly, the company's shareholders demanded audited financial statements, (2) there was emerging in London at the time the capacity and willingness among London accountants to provide external audit services, and (3) the British Parliament passed various acts that required financial statements of companies in other industries to be audited. After a few years, only the management's external auditor was retained. He subsequently influenced the company's development of management accounting. In addition, the company's early external auditors were influential in the development of the Institute of Chartered Accountants of England and Wales.

Evidence on the Impact of Internal Control and Corporate Governance on Audit Fees

Previous studies generally suggest that internal control and external auditing can substitute for each other, so that better internal control will be associated with lower audit fees. However, their empirical results do not support this view. In contrast, previous studies of the interaction between corporate governance and external audit services often assume that they are complementary, and that improved governance is associated with higher audit fees, although the evidence about this issue is also mixed. We examine whether the ‘substitution’ or ‘complementary controls’ views apply. We find that measures of internal auditing, corporate governance, and concentration of ownership are all positively related to audit fees, consistent with the explanation that controls are complementary. The study makes a contribution by assisting regulators in understanding the effects of regulation of corporate governance, and by showing auditors and auditing standard setters that the view that internal controls can substitute for external auditing may not be helpful. We also find that these relationships hold only in a relatively less‐regulated environment.

Improving corporate governance: the role of audit committee disclosures

An increasing number of earnings restatements along with many allegations of financial statement fraud committed by high profile companies (e.g. Enron, WorldCom, Global Crossing, Adelphia) has eroded the public confidence in corporate governance, the financial reporting process, and audit functions. The Sarbanes‐Oxley Act of 2002 was an attempt to regain confidence and trust in corporate America and the accounting profession. The Act addresses corporate scandals and the perceived crisis in the auditing profession. Some of its provisions relate to the audit committee oversight function over corporate governance, financial reporting, internal control structure, internal audit functions, and external audit services. This study examines three types of audit committee disclosures: the annual report of the audit committee; reporting of the audit committee charter in the proxy statement at least once every three years; and disclosure in the proxy statement of whether the audit committee had fulfilled its responsibilities as specified in the charter. This study conducts a content analysis on audit committee disclosures of Fortune 100 companies.

The Market for External Audit Services in the Public Sector: An Empirical Analysis of NHS Trusts

This study investigates the market for audit services in the UK National Health Service (NHS). The market has a number of interesting features, including the presence of the Audit Commission as a regulator, appointer and provider of audit services. Following a theoretical overview of audit pricing in the NHS, evidence is provided on the behaviour of private sector auditors in an environment where audit risk characteristics differ from the private sector. The research also investigates, for the first time in the public sector, the relationship between audit fees and non–audit (consultancy) fees. Comparisons are also drawn between audit fees in the public and private sectors in an analysis of audit fees by industry. Despite some key similarities, the study shows that a number of differences exist between private and public sector audit fee models. In particular, we find no evidence of Big 6 (or mid–tier) auditor premiums, but we do find a significant negative relationship between audit and consultancy fees providing support for the ‘knowledge spill–over’ hypothesis. In addition, the fees charged to trusts appear significantly lower than their private sector counterparts, despite trust auditors having additional duties to perform. Possible explanations for this finding are offered in the paper.

Quality dimensions in external audit services- an external user perspective

A particular characteristic of auditing is that it is aimed at a heterogeneous group of stakeholders with occasionally diverging interests. This makes it even more relevant, though complicated, to determine exactly what users regard as quality. Based on empirical research, this paper investigates how two external user groups (shareholders and financial journalists) perceive audit quality, and analyses whether managing directors (preparers) and public accountants (auditors) evaluate the salient quality attributes differently. The overall results are as follows. (1) External users tend to perceive audit quality attributes as attributes that also inspire confidence in the auditor. (2) A number of different quality attributes can be summarized under six main quality dimensions. These dimensions mainly concern moral and ethical aspects. (3) The four groups of respondents (shareholders, financial journalists, managing directors and public accountants) assign significantly different values to these quality dimensions.

Economic aspects of audit regulation and auditor liability

This thesis provides one of the first (to the author's knowledge, the first) micro-economic analyses of audit regulation and auditor liability. The analysis draws on insights from the economics and law literature that liability and regulation affect behaviour of individuals and organisations. The major research questions addressed in the thesis are the following: 1) How is demand for external audit services affected by joint and several liability of directors and external auditors? 2) How do auditor liability and professional audit standards affect audit quality? 3) Is it in the public interest to use auditor liability and professional audit standards jointly to monitor audit quality? The analysis is general, in the sense that a number of alternative regulatory scenarios are considered, and therefore hopes to be of relevance to various legal environments. Propositions about audit demand and production behaviour are drawn, as well as corollaries about the welfare implications of audit regulation and liability. Some major conclusions from the economic analysis are the following. 1) Consistency in judicial reasoning should be promoted. Certainty about what constitutes 'due care' leads to compliance by directors and auditors. 2) Uncertainty about due care crucially affects behaviour, both of auditors and directors. 3) Liability insurance arguments are irrelevant for audit demand when the due care level for directors is fairly certain. 4) Statutory audit requirements should only be imposed under limited circumstances. 5) More prescriptive professional audit standards have a positive effect on audit quality, but one standard for all client situations can never lead to social efficiency. 6) Liability restriction has a negative effect on audit quality. It may however promote socially efficient behaviour when there is overproduction of audit quality. 7) The joint use of liability restriction and more prescriptive professional audit standards may lead to a status quo in terms of audit quality produced, and therefore not welfare improving.